Why I Feel Bearish On Revlon

| About: Revlon, Inc. (REV)
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Summary

Revlon needs a total overhaul of management and marketing strategies to recover lost glory, including a shift from having one majority shareholder.

Exit from China lost it a major revenue earner and ended up ceding more ground to its competitors.

A series of injurious decisions such as debt take-overs has led to a fall in the company’s market share and shaken investor confidence.

Background

Revlon, Inc (NYSE:REV) was founded by Charles and Joseph Revson in 1932. They partnered with Charles Lachman; the 'L' in 'Revlon' is attributed to him. Revlon's initial product was nail enamel-which was specially manufactured using pigments to make it opaque. Despite this being in the Great Depression of the 1930s, the company had grown into six-figure revenues in six years. In 1955, Revlon went public. From the 1960s onwards, the company made several acquisitions including:

  • Ty-D-Bol- which was later resold to the original owners
  • US Vitamin and Pharmaceutical Corporation (1967)- marking Revlon's debut into diabetes drugs
  • Mitchum-1970
  • Coburn Optical Industries
  • Barnes-Hind- a maker of optical lens
  • Lewis- Howe Company

Despite these major acquisitions, Revlon could not measure up to Estee Lauder (NYSE:EL), it biggest competitor at the time. So much so that Revlon's share in cosmetic sales dropped by half, from 20% to 10%. A series of takeovers including Aziza, Ellen Betrix and one unsuccessful of Gillette could not rescue Revlon's fortunes. In 1985, Pantry Pride bought Revlon at 58$ per share, amounting to $2.7 billion. Pantry Pride was a subsidiary of MacAndrews and Forbes owned by Ronald Perelman, making him the majority shareholder of Revlon Inc. However, this buyout took a $2.9 billion chunk out of Revlon, a debt that would weigh down on its fortunes for several years.

Global Beauty Market

The global beauty market is a billion-dollar industry that has grown from the traditional personal care methods to more advanced and specialized products. Indeed, beauty routines vary among people from different regions. In China, for instance, beauty routines are completed in one step while a beauty routine in South Korea consists of 12 steps of skincare.

As global trends grow in scope, so does the number of users of beauty products. For example, in the US, products targeting men such as aftershave and cologne have a robust market. Statistics project a 3.5% to 4.5% increase in the market demand for personal care products, estimated to reach $500 billion in 2020.

One key force for this growth is the market for product ingredients such as surfactants, whose market is projected to grow to $11.76 billion by 2023, up from $7.46 billion in 2014.

In market share by region, 29% of the global market share is taken up by the Asia-Pacific, attributed to urbanization and a bulging middle class with high purchase power. Europe and North America take second place and third place respectively.

The market leaders in the beauty and cosmetics industry are L'Oreal (OTCPK:LRLCF) at 20%, Estee Lauder at 7% and Revlon at 0.5%.

One constant feature of a rapidly growing company is its ability to reinvent itself in the face of changing times. With many customers preferring to shop online as opposed to physically visiting department stores, it is upon a company to open up its virtual doors to this fast-growing segment of consumers.

Why I Recommend a 'Sell'

One setback to Revlon's growth is the decline in its market share. This is partly attributed to strong currency fluctuations which led to a decline of 18% in net income in 2015, to $31.3 million. In addition, the company has also incurred expenses that weighed heavily on its revenue, such as the Brand Renewal Program, media promotion and brand activation. These would not necessarily have negative impact on the company, but they have ultimately reduced the much-needed financial clout needed to wrestle a larger market share from its competitors.

Debt

The 2016 acquisition of Elizabeth Arden would be hailed as a business strategy of eliminating a competitor. However, this acquisition saddled the already distressed Revlon with a huge debt load, since the $870 million price tag also included Elizabeth Arden's debt. Though this debt will be refinanced by a $2.6 billion refinancing deal, it does not offer much reprieve to the struggling Revlon. In addition, a large debt load impedes Revlon's ability to channel more funds towards research and innovation. This cedes more ground to its competitors who have access to large fund reserves.

Sole Controlling Shareholder

The billionaire Ron Perelman is the controlling shareholder of Revlon, making him the sole decision-maker in the company. As it stands, the future of Revlon depends on the injection of new progressive ideas to propel the company forward. One option would be to sell Perelman's controlling stake and bring more people into management, and hence break an individual's monopoly.

Dividend

Unlike its competitors Estee Lauder and L'Oreal who paid dividends of 0.34 and 3.520 respectively in 2016, Revlon stock has failed to yield any dividend for its shareholders for. It is therefore unwise to keep holding to a stock that is unyielding.

Conclusion

Going by the above reasons, I would recommend a sell-off on Revlon stock. The company seems to have made several missteps which have led it to this situation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.